Phantoms of the runway to dominate at Paris

Airbus eyed as A350 stuck on drawing board; for Boeing, show's a breeze

By

AudeLagorce

LONDON (MarketWatch) -- Hundreds of aircraft will take to the skies at the world's largest air show in Paris next week, making a flap to attract new customers, but the two planes most on everyone's mind will be nowhere in sight.

Boeing
BA, -0.24%
is keeping its phenomenally successful midsize jet, the 787 Dreamliner, under wraps until July 8, when it's due to roll out of a hangar in Everett, Wash.

Still, the battle of these phantoms will dominate the industry's most closely watched trade gathering.

"The Paris Air Show begins next week and once again observers are queuing up in anticipation of scoring who will win: Airbus or Boeing," said Scott Hamilton, of aviation consulting group Leeham Co.

Pundits want assurance that assembly of the Dreamliner is on track. And they wonder whether Airbus has sufficient credibility to gain momentum on its A350XWB.

That's quite a reversal from earlier in the decade, when Boeing struggled with a management crisis while Airbus seemed unstoppable.

"Talk about a change of fortunes... A couple of years back the boot was on the other foot," said Gareth Evans, head of the European aerospace practice of consultancy AT Kearney in London.

Smaller plane makers Bombardier (BBD.PRD) of Canada and Embraer
ERJ, -0.22%
of Brazil will also showcase their wares, sure to announce orders, and perhaps even launch a new aircraft.

The Israelis, Russians and Chinese will also be there, seeking their own slice of the lucrative global defense and aerospace market. See story on Israel's offerings.

A chance to spin for Airbus

The industry's largest annual event will provide a unique forum for Airbus, in particular this year, to reassure investors, customers and suppliers that the worst of its financial woes are over after heavy losses last year.

"It's an opportunity for them to manage perceptions at a difficult time for the company," said Evans of the air show, which starts Monday and runs through the week. It's expected to draw 2,000 exhibitors and 200,000 visitors.

Airbus, which is owned by European aerospace and defense company EADS (005730), reported a hefty loss last year and has warned of further red ink ahead. The troubles started a year ago, when it announced significant delays to its flagship A380 program. The setback led to an insider-trading scandal, the demise of two chief executives and the relegation of the A350 program to the back burner.

Now everyone wants to know if the A350XWB -- a revamp of the A350 that was spurred by the frosty reception customer airlines gave the original design -- can gather momentum, particularly as rumors swirl of yet another potential redesign.

"Airbus still has a giant hurdle to climb before the A350XWB takes to the skies, and while we do not doubt that the aircraft may eventually sell, we have serious doubts that in its present drawing-board form, the XWB will be enough of a competitor for the Dreamliner," Howard Wheeldon, a senior strategist at BGC Partners in London, told clients in a recent note.

Although the A350XWB has been haunted by such criticism for months, many airlines are still eager to see it gain velocity -- some because they have an all Airbus-fleet, others because they would face a lengthy wait for the Dreamliner, having missed the early delivery slots.

And no one in the industry wants the current duopoly to turn into a monopoly.

With that in mind, many original A350 customers feel they've earned a seat at the design table. According to Wheeldon, several carriers are asking Airbus to consider a single-barrel composite fuselage for the body of the aircraft, instead of the panel structure it has chosen. Those calls, if heeded, would involve significant modifications and likely delays.

In the run up to the show, however, there were signs that some airlines were warming up to the plane, which will seat 250 to 300 passengers in a standard configuration and list for about $230 million.

First, Middle Eastern carrier Qatar Airways converted its original A350 order into an A350XWB one, giving the aircraft a much-needed credibility boost. Then Irish carrier Aer Lingus Group (AERL) placed a $2.4 billion order for 12 planes, including the A350XWB.

But both carriers have all-Airbus fleet and many original customers of the A350 have yet to convert their orders, including aircraft leasing giant International Lease Finance Corp. (ILFC), a unit of AIG
AIG, -0.89%
and U.S. Airways
LCC, +1.12%

"It would be a marvelous sign of confidence if one of the leasing companies confirmed their order," said Sandy Morris, an analyst at ABN Amro. Confirmation from a leasing company would send a strong signal because they'll only buy planes if they expect strong demand.

"If the show passes with no blue-chip A350XWB endorsements, there will be serious questions raised about the plane's competitiveness," said Richard Aboulafia, vice president at U.S.-based aerospace consultancy the Teal Group.

Endorsements would also help Airbus to raise the estimated 11.6 billion euros ($15.4 billion) it needs for development. So far, management has been vague on the financing, instead highlighting closer relationships with risk-sharing partners.

Despite these difficulties, Airbus Chief Executive Louis Gallois remains optimistic, saying he expects to book more than 100 firm orders for the plane by the end of the show. Airbus now has a dozen firm orders for the aircraft and about 150 pledges.

Among the orders rumored to be in the works, the largest could come from Indian domestic airline Kingfisher. Emirates, the biggest Mideast airline, is still looking to buy around 100 aircraft in the 300-seat, long-range category, but remains undecided between the Dreamliner and the A350XWB. It's not expected to make an announcement at the show.

Show's a breeze for Boeing

The stakes aren't nearly so high for Chicago-based Boeing.

Sandwiched between its investor day and the Dreamliner's rollout, the Paris Air Show is something of a "non-event" for the company this year, said Aboulafia of the Teal Group.

Management's focus is unlikely to stray from that July 8 deadline, when customers including Air Canada (AC.A) and Virgin Atlantic get their first glimpse of the aircraft.

The Dreamliner is the fastest-selling new plane in aviation history, having already garnered more than 580 orders from 44 airlines. And Boeing is keen to stick to the 07-08-07 rollout deadline, which has been chosen to jive with the plane's designation. Read more about Dreamliner production.

Given the turmoil Airbus encountered because of the A380 delays, it's crucial for Boeing to show it can deliver the 787 -- and bang on time.

"They have so much invested in the 787. They absolutely need to get it right," said AT Kearney's Evans.

But much about the process of building the plane is new, from the amount of composite materials being used, to the number of outsourcing partners involved and spread around the globe.

"It's the first commercial wide-body plane to have a composite fuselage....Boeing is outsourcing more parts than ever from all over the world, particularly Italy and Japan," said Doug McVitie of France-based aerospace consultancy Arran Aerospace.

Companies involved include Kansas-based Spirit AeroSystems
SPR, -0.51%
in charge of some of the composite fuselage sections, and Italy's Alenia Aeronautica, which makes the aircraft's horizontal stabilizers.

Although the program seems on track to meet its rollout, observers warn that it could still derail. The problems with the A380 emerged more than a year after its first test flight.

"Something can always go wrong when putting together a brand new airplane. The next nine to 12 months are key," said Teal Group's Aboulafia.

The first flight of the Dreamliner is scheduled for mid-August. Launch customer Nippon Airlines is scheduled to take delivery of its first aircraft in May 2008.

Boeing released its 20-year outlook on Wednesday, and will try to focus attention on the extraordinary growth potential of the industry. See full story. A few more orders for the 787 or the 747 revamp, known as the 747-8, are likely at the show.

A Dreamliner order from one of the Airbus A350's original customer would be the grand slam for Boeing. And it may happen. Bear Stearns recently told clients it expects leasing firm IFLC to place an order for 40 of the 787s at the Paris show.

Keep an eye on Embraer, Bombardier

Although the Boeing-Airbus saga will dominate, smaller makers such as Canada's Bombardier and Brazil's Embraer
ERJ, -0.22%
could make hefty order announcements.

Bombardier, which is especially well known for its fleet of business jets, may also unveil orders for some stretched versions of its CRJ series regional jets. It has recently had some success selling them to the likes of Deutsche Lufthansa. (823212).

Observers doubt, however, that it'll launch the long-delayed C-Series, a new family of 110-130 seat commercial jets potentially competing with the smaller planes made by Boeing and Airbus.

Relative newcomer Embraer, meanwhile, is likely to push ahead with efforts to establish itself as an alternative to the U.S. and European giants in the market for smaller mainland commercial jets.

It could announce orders for some of its new E-Jets family of planes, which are the only aircraft available in the 100-seat category. There's been speculation that India's Paramount Airways could place an order for 40 aircraft from the E-Jet family, valued in the $2 billion range.

The Israelis, Chinese and the Russians are also sending large delegations to the show as they seek to raise their aerospace profile.

Israel, the world's fourth-largest exporter of aerospace, defense and security technology behind the U.S., Russia and France, will be flaunting its expertise in stealth technology, including unmanned aerial vehicles.

David Arzi, chairman of the Israel Export & International Cooperation Institute, said the 11 companies exhibiting at the show could sign as much as $800 million in new contracts there.

The Russians will be giving an update on their Sukhoi regional jet, the Superjet 100, which has so far only been ordered by domestic airlines.

The Chinese may reveal more about their ambitions to build their first passenger aircraft to rival Western manufacturers. They will also be showcasing their space activities.

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